ASAP

On July 17, 2015, a California appellate court affirmed the denial of an intellectual property attorney’s anti-SLAPP motion against his former employer. Terrence Wyles, the defendant and former in-house counsel for medical products company West Hills Research and Development, Inc. (“West Hills”), sought to dismiss his former employer’s trade secrets misappropriation case by asserting that its lawsuit interfered with his efforts to file a complaint against its senior officers for embezzlement. The defendant alleged that he retained copies of confidential company documents following the termination of his employment as evidence to support a shareholder derivative lawsuit he planned to file alleging that the company was engaging in financial misconduct. The Court of Appeals affirmed the denial of the defendant’s motion, finding that the alleged financial misconduct had nothing to do with the misappropriation of trade secrets underlying the company’s complaint.

Factual Summary

West Hills developed bandage products designed to instantly relieve pain from burn injuries. For these products, the company holds international patent applications. The defendant is an attorney licensed to practice law in Colorado. On October 12, 2012, the company hired the defendant as its in-house intellectual property counsel, and on April 5, 2013, terminated his employment.

On July 26, 2013, the company sued Wyles alleging twelve claims, including the misappropriation of trade secrets. The company also sought declaratory judgment, injunctive relief, and monetary damages for Wyles’ alleged misconduct. West Hills’ lawsuit centered on allegations that Wyles stole its trade secrets to set up a competing business following the termination of his employment.

The defendant filed an anti-SLAPP motion seeking to strike the complaint in its entirety. California’s anti-SLAPP statute is intended to bring a prompt dismissal over claims that allegedly trample over an individual’s constitutional rights, such as the right to free expression or to petition. The defendant argued that the conduct underlying the company’s complaint is protected by his right of petition and the “litigation privilege” covering pre-litigation communications. He asserted the company’s claims against him are at least partly based on his intent to file a shareholder derivative lawsuit.

To support this motion, the defendant submitted a declaration accusing the company’s top officials of embezzling money from the company during his employment. He stated he gathered proof of this embezzlement and received, from an anonymous source, supporting bank records. From these bank records, the defendant drafted a document to chronicle the company’salleged misconduct. In his declaration, the defendant stated his intent to report the fraudulent activity to the police and tax authorities, and initiate a shareholder derivative action.

The defendant also denied misappropriating the company’s trade secrets, failing to return its trade secret documents (of which he had the only copy), and deleting e-mails containing its trade secrets. The defendant maintained he only accessed “time sensitive government documents in connection with [his] role as Chief InHouse Counsel.”

The company opposed the defendant’s anti-SLAPP motion because the conduct underlying its complaint – the misappropriation of its trade secrets – lacks any connection to the purported financial misconduct the defendant accused its executives of perpetrating.

The company submitted a declaration of Allen Sussman, partner at the law firm Loeb & Loeb, showing he demanded that the defendant return all of the company’s property and submit a report of the status of all pending matters, and that the defendant refused. The company also submitted documents showing it sought the Colorado State Bar and Colorado Supreme Court’s assistance in recovering this property. In response to this, the defendant submitted a thumb drive containing around 14,000 files, affirming to the Colorado Supreme Court he returned all confidential documents, but kept copies to himself “in order to respond to [West Hills’] claims, to preserve the evidence for the benefit of Aluminaid shareholders, and in order to preserve evidence of Aluminaid’s illegal conduct in order to prevent the continuation of that conduct.”

The company also submitted a declaration of one of its product consultants, who described the defendant and a former West Hills Director’s attempts to recruit him to join their new venture which they boasted would take over West Hills’ operations and patents. This consultant also stated in his declaration he saw an agreement between this new venture and one of the company’s’ chief competitors.

The defendant denied in a subsequent declaration he made any attempts to form a competing business or disclose confidential information to a third party. However, he admitted he retained documents following the termination of his employment and has refused to “turn over the documents for which Sussman has threatened to report me to the Colorado State Bar . . . .” The defendant claimed these documents include financial information which shows “embezzlement, tax fraud and possible money laundering.” He also stated he informed the company’s CFO . . . of his “plan to file an action.”

The trial court denied the defendant’s anti-SLAPP motion in its entirety, determining the defendant failed to show that the misappropriation of trade secrets as protected activity. The defendant appealed.

Appellate Court’s Analysis

In reviewing the denial of the defendant’s anti-SLAPP motion de novo, the Court of Appeal applied the same legal analysis applied by the trial court and came to the same conclusion: The defendant did not make a threshold showing that the challenged causes of action arise from protected activity. Rather, the company’s complaint rests on allegations that the defendant improperly accessed its trade secrets to form a competing venture, not pre-litigation activity related to a shareholder derivative lawsuit. The appellate court concluded the trade secret material the defendant allegedly kept did not relate to the shareholder derivative lawsuit at all; it had nothing to do with financial malfeasance.

Takeaways for Employers and Practitioners

Critical to the court’s analysis of the anti-SLAPP motion was the company’s presentation of an abundance of evidence of the defendant’s competitive activity. This evidence was heavily relied upon by the trial court in denying the anti-SLAPP motion and subsequently by the appellate court in the same manner. This evidence turned the attention away from the shareholder derivative action and towards the defendant acting for his own benefit. In other words, the court was able to find that the defendant’s activity was not in furtherance of his freedom of speech or petition.

Employees seeking to preserve evidence of perceived wrongdoing in anticipation of litigation should follow the discovery procedures afforded through the litigation process. The type of self-help engaged in by Wyles to preserve is not likely to be condoned by any court. Undertaking independent efforts to secure or otherwise safeguard such evidence risks misappropriating the company’s trade secrets and other claims.

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.